Research On RMB Real Effective Exchange Rate And The Equilibrium Exchange Rate

In the day of July21,2005, People’s Bank of China announced the reform of theexchange rate: RMB exchange rate mechanism has changed from pegging to the dollar to akind of managed floating exchange rate system based on supply and demand in the marketwith reference to a basket of currencies. The exchange rate reform has been lasting for sixyears, the RMB exchange rate in the world economy is still facing strong pressure toappreciate. In this background,the factors which play major roles in the real effectiveexchange rate of RMB and the extent of the deviation between the real effective exchangerate and the equilibrium exchange rate are not only the hot topics in academia,but alsodetermines the scientificalness and the rationality of the exchange rate mechanism.In this paper, from the perspective of the international economy, we first introduceeight kinds of the IMF classification about the current international exchange rate regimearrangements, the economic performance of the exchange rate regime and some majortheories about the academic exchange rate regime choice. Secondly，the paper has acomprehensive interpretation of the existing exchange rate formation mechanism withreference to a basket of currencies in advance. In empirical research, the real effectiveexchange rate is the dependent variable. Independent variables are economic variables inthe domestic environment, economic variables in external environment and economicvariables of the government’s policy. Economic variables in the domestic environmentinclude the change in money supply and the indicator about the relative productivityprogress of tradable goods sector which reflect the strength of the domestic supply-side.Economic variables in external environment refer to the terms of trade which make thetotal value of imports compare with exports and foreign direct investment (FDI). Economicvariables of the government’s policy mainly refers to the change of China’s foreignexchange reserves, which reflects the People’s Bank of China’s macro-control on foreignexchange, reflecting the feature of the management of the exchange rate after reform inChina. In the last part of the empirical research, we compare the real effective exchangerate (REER) and behavior of the equilibrium exchange rate (BEER) which is obtainedthrough the HP filtering. We want to focus on the extent of the deviation of the realeffective exchange rate in the reality and the standard equilibrium exchange rate and thespeed of the real exchange rate adjusting to the equilibrium level.Finally, with China’s reality, we analyse in the further RMB real effective exchangerate appreciating slightly after the reform and make a number of strategies about the RMB exchange rate system reform.The study of real effective exchange rate emphasizes the multiple variablesinfluencing the exchange rate in common, Empirical test results can make us have aquantitative understanding of the extent of the deviation of the real effective exchange rateand the equilibrium exchange rate. On this basis, we must also broaden our horizons toknow the real effective exchange rate is a dynamic process of continuous improvement,which change along with internal and external environment. In the reform of RMBexchange rate system, from the actual situation of China’s economic development, takingfull account of China’s social and economic capacity, we can’t make the exchange ratefluctuating severely. Of course, when we manage and adjust the exchange rate, we alsomust consider international factors comprehensively. Our future goal is to make the RMBexchange rate formation mechanism adapt to market changes in supply better and moreflexible.